Matter & Substance
  November 2, 2015

A Shorter Cash Flow Cycle Means A Stronger Business

Cash flow issues can frequently arise when a company is growing very rapidly. Growth in sales results in more accounts receivable and potentially increased inventories and overhead costs. All of these items require the deployment of cash. The company's cash flow can be stretched if cash collections do not keep up with the growth in the ongoing uses of cash. This is why companies need to closely monitor their cash and potentially seek additional sources of financing and even equity investment when they are successfully growing their company.

One way to maintain a healthy cash flow is to collect your company's accounts receivable. If you can increase your cash flow cycle by 15 days as you collect those accounts receivable, you can really increase your cash quickly. The best way to do this is to systematize the collection process and be persistent. Many of our clients are very successful in collecting their receivables. The best practices are to put a person in charge of collections and have them just call and call to get paid.

Another way is to manage the outflows side. The best practice is to take full advantage of your suppliers' payment terms. If the supplier is offering net 30 day terms, use electronic banking to make the payment on day 30. Also, negotiate with suppliers for extended payment terms: will they stretch net 15 terms to net 30 days - or net 30 day terms to net 45 days?

If you can improve the cash flow cycle of your business, you can reduce your debt and interest expense. You can also have the flexibility to meet challenges and opportunities as they arise.